New York City is poised for a tech revival

One thing that was puzzling about the “web 2.0 boom” from 2003-2008 was how irrelevant the East Coast, and particular New York City, was compared to the first dot-com boom. There were a few big hits – Right Media comes to mind – and a big near miss – Facebook – which started in Boston but moved to the West Coast.

I was mostly checked out of the internet scene in the 90s (in perpetual grad school), but from everything I’ve read and heard, New York City and the East Coast in general was much more competitive with the West Coast. One interesting supporting data point: Matrix Partners in Boston had the best return of any VC fund in the 90s (an astounding 516% IRR).

I think it’s fairly easy to explain what happened to Boston in the 2000′s. In the 90′s much of the action was around infrastructure and enterprise software – and Boston (led by MIT) tends to be very infrastructure and enterprise oriented. I am told Boston is still relevant in biotech and cleantech, and perhaps infrastructure and enterprise IT will have a resurgence, although even those areas seem to now be dominated by the West Coast.

But the question that has puzzled me is: why did New York City lag behind the West Coast this decade so much more than last decade? Especially since the internet in the 2000′s has been more than ever about consumers, media, and advertising – traditional New York City strengths?

I think the only explanation is that the finance bubble of 2003-2008 was a giant talent suck on the East Coast. The people I knew graduating out of top engineering or business programs on the East Cast were all trying to work at hedge funds or big banks or else felt like fish out of water and moved west. Money was flowing so freely in the finance world that there was no way the risk/reward trade off of startups could compete. Eventually it just became downright idiosyncratic to be a startup person on the East Coast. The Larry and Sergey of the East Coast were probably inventing high frequency trading algorithms at Goldman Sachs.

But this is why New York City now seems poised for a technology startup boom. The finance bubble has burst and the industry will hopefully return to its historical norm, about half its bubble size. The traditional advertising and media businesses are in disarray. The people who work in them will no doubt find new applications for their talents.

There is also a nice ecosystem developing in New York City. Union Square Ventures is one of the best VC’s in the country, with early stage investments in companies like Twitter and Etsy (that were followed on by top West Coast VCs at significant markups). Bessemer is an old firm that has a managed to stay relevant with investments in Yelp, Skype, and LinkedIn among others. There is also a new wave of scrappy Boston firms spending a lot of time in New York City – specifically Spark, General Catalyst, Flybridge, and Bain Ventures. First Round Capital out of Philadelphia is extremely active in early stage investing in New York. There are a bunch of veteran entrepreneurs actively investing in and mentoring seed stage startups. Google has a big office here and many people seem to be leaving to go start companies.

But most importantly, the engine of the startup economy, young engineers, will be returning to doing something besides shuffling money around. As Obama said:

…Wall Street will remain a big, important part of our economy, just as it was in the ’70s and the ’80s. It just won’t be half of our economy. And that means that more talent, more resources will be going to other sectors of the economy. And I actually think that’s healthy. We don’t want every single college grad with mathematical aptitude to become a derivatives trader. We want some of them to go into engineering, and we want some of them to be going into computer design…

That’s why I don’t just want to see more college graduates; I also want to specifically see more math and science graduates, I specifically want to see more folks in engineering. I think part of the postbubble economy that I’m describing is one in which we are restoring a balance between making things and providing services…

New York City has many of the same strengths as Silicon Valley – merit-driven capitalism, the embrace of newcomers and particularly immigrants, and a consistent willingness to reinvent itself. Silicon Valley will always be the mecca of technology, but now that people here are getting back to, as Obama says, making things, New York City has a shot at becoming relevant again in the tech world.